Modular Medical(MODD) - 2021 Q3 - Quarterly Report

Part I – FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, lease obligations, debt, equity transactions, stock-based compensation, income taxes, related party transactions, commitments, contingencies, and subsequent events Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time | Metric | December 31, 2020 ($) | March 31, 2020 ($) | | :-------------------------- | :---------------- | :--------------- | | Cash and cash equivalents | 596,542 | 3,122,134 | | Total Assets | 1,291,526 | 3,858,551 | | Total Liabilities | 1,292,279 | 980,129 | | Total Stockholders' Equity (Deficit) | (753) | 2,878,422 | | Accumulated Deficit | (14,174,465) | (8,569,034) | - The company's total assets decreased by approximately $2,567,025, and total stockholders' equity shifted from positive to negative, primarily driven by a significant reduction in cash and an increase in accumulated deficit[6] Condensed Consolidated Statements of Operations This section outlines the company's revenues, expenses, and net loss over specific periods, reflecting operational performance | Metric | 3 Months Ended Dec 31, 2020 ($) | 3 Months Ended Dec 31, 2019 ($) | 9 Months Ended Dec 31, 2020 ($) | 9 Months Ended Dec 31, 2019 ($) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Operating Expenses | 1,870,567 | 1,135,848 | 5,603,957 | 3,431,429 | | Net Loss | (1,870,545) | (1,133,517) | (5,605,431) | (3,403,281) | | Net Loss Per Share (Basic & Diluted) | (0.10) | (0.06) | (0.30) | (0.19) | - The company experienced a substantial increase in net loss for both the three months (from $(1,133,517) to $(1,870,545)) and nine months (from $(3,403,281) to $(5,605,431)) ended December 31, 2020, compared to the prior year, primarily due to higher operating expenses[8] Condensed Consolidated Statements of Stockholders' Equity (Deficit) This section details changes in the company's equity, including net losses, stock issuances, and stock-based compensation - Total Stockholders' Equity (Deficit) declined from $2,878,422 as of March 31, 2020, to $(753) as of December 31, 2020, primarily due to recurring net losses[11] - Private placements of common stock generated $1,118,634 (June 30, 2020) and $667,248 (Dec 31, 2020), partially offsetting the accumulated deficit[11] - Stock-based compensation recognized during the period totaled $940,374 ($344,716 + $300,604 + $295,054)[11] Condensed Consolidated Statements of Cash Flows This section reports the cash generated and used by operating, investing, and financing activities over specific periods | Metric | 9 Months Ended Dec 31, 2020 ($) | 9 Months Ended Dec 31, 2019 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | (4,570,713) | (2,776,998) | | Net cash used in investing activities | (109,541) | (58,278) | | Net cash provided by financing activities | 2,154,662 | 0 | | Net decrease in cash and cash equivalents | (2,525,592) | (2,835,276) | | Cash and cash equivalents at end of period | 596,542 | 3,718,492 | - Cash used in operating activities increased significantly in 2020, but financing activities provided substantial cash, primarily from private placements and a PPP loan, which helped mitigate the overall cash decrease[14] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1 – The Company and Summary of Significant Accounting Policies This note describes the company's business, its going concern status, and the impact of the COVID-19 pandemic on its operations - Modular Medical, Inc. is a development-stage medical device company focused on designing and commercializing an innovative insulin pump[18] - The company expects to incur operating losses and cash outflows, raising substantial doubt about its ability to continue as a going concern, necessitating additional capital raises[20] - The global COVID-19 pandemic has negatively affected the economy, supply chains, and financial markets, with the full impact on the company's performance remaining uncertain[31] NOTE 2 – Leases This note details the company's lease accounting policies, new lease agreements, and future lease payment obligations - The company adopted ASC 842 for leases on April 1, 2019, and executed a new 39-month corporate facility lease in San Diego commencing April 1, 2020[38] - A right-of-use asset of $270,950 was obtained, along with a $139,000 lease incentive for improvements[39] | Annual Fiscal Years | Operating lease ($) | | :------------------ | :-------------- | | 2021 | 37,239 | | 2022 | 153,432 | | 2023 | 158,028 | | 2024 | 40,692 | | Present value of lease liabilities | 338,042 | - Rent expense for the nine months ended December 31, 2020, was $80,654, up from $25,500 in the prior year[41] NOTE 3 – Note Payable This note describes the company's Paycheck Protection Program (PPP) loan, its terms, and the status of its forgiveness application - The company received a $368,780 unsecured loan under the Paycheck Protection Program (PPP Note) on April 24, 2020[42] - The PPP Note is due in April 2022, accrues interest at 1.0% per annum, with monthly payments starting September 2021[43] - An application for forgiveness of the PPP Note was submitted in October 2020, but forgiveness is not assured[44] NOTE 4 – Stockholders' Equity (Deficit) This note details the company's private placement of common stock and the associated registration requirements - As of December 31, 2020, the company sold 962,387 shares of common stock in a private placement (2020 Placement) at $2.87 per share, generating gross proceeds of $2,762,054[45] - The company is required to file a registration statement with the SEC within 90 days of the 2020 Placement closing to register the shares for resale[45] NOTE 5 – Stock-Based Compensation This note outlines changes to the equity incentive plan, unamortized compensation costs, and details of stock option grants - The 2017 Equity Incentive Plan was expanded in January 2020, increasing reserved shares by 1,000,000 to a total of 4,000,000[46] - Unamortized stock-based compensation cost was $2,354,079 at December 31, 2020, expected to be recognized over approximately 2.06 years[47] - During the nine months ended December 31, 2020, options to purchase 355,476 shares were granted, with a fair value of $825,838, resulting in $223,878 recorded as expense[48] | Metric | Value | | :-------------------------- | :------ | | Shares Available for Grant | 487,412 | | Number of Shares Outstanding | 3,512,588 | | Weighted Average Exercise Prices ($) | 1.71 | - As of December 31, 2020, 1,927,052 options were exercisable with a weighted average exercise price of $1.16 and an aggregate intrinsic value of $4,036,117[52] NOTE 6 – Income Taxes This note explains the company's deferred tax assets, valuation allowance, and unrecognized tax benefits - The company has recorded a full valuation allowance against its federal and state net deferred tax assets, as management believes they are not likely to be fully realized[54] - No liability for unrecognized tax benefits related to uncertain tax positions was recorded as of December 31, 2020[55] NOTE 7 – Related Party Transaction This note discloses an outstanding payable to a board member from a terminated consulting agreement - As of December 31, 2020, the company had an outstanding payable of $5,585 to a member of its board of directors, stemming from a terminated consulting agreement[56] NOTE 8 – Commitments and Contingencies This note addresses the company's involvement in legal proceedings and contractual indemnification arrangements - The company is involved in legal proceedings and contractual indemnification arrangements in the normal course of business[57][58] - No amounts have been reflected in the financial statements for indemnification liabilities due to the inability to estimate the maximum potential amount[58] NOTE 9 – Subsequent Event This note details the private placement of convertible promissory notes in February 2021, including their terms and conversion features - On February 8, 2021, the company sold $1,100,000 of convertible promissory notes in a private placement[59] - The notes bear 12% annual interest, payable monthly, and mature on September 30, 2021[59] - Notes automatically convert upon a Qualified Financing (equity offering of at least $5,000,000) at an 80% conversion price (20% discount)[60] - Holders can demand repayment or convert to common stock at $2.87 per share (or 20% discount to any financing) after maturity or upon a Change of Control[61][63] - The company's chairman and CEO, along with an existing investor, purchased the notes[64] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting its status as a development-stage medical device company, the significant net losses incurred, and the ongoing challenges related to liquidity and capital resources. It also details the operational and financial impacts of the COVID-19 pandemic and discusses key operating expenses Company Overview This section provides an overview of the company's development-stage status, financial performance, and going concern challenges - Modular Medical, Inc. is a development-stage medical device company focused on an innovative insulin pump, with development substantially completed but awaiting FDA clearance[67][68] - The company has not generated product sales revenue and incurred net losses of approximately $5.6 million for the nine months ended December 31, 2020[68] - As of December 31, 2020, the company had negative working capital of approximately $0.2 million and an accumulated deficit of approximately $14.2 million, raising substantial doubt about its ability to continue as a going concern[68][69] Impacts of COVID-19 This section discusses the negative effects of the COVID-19 pandemic on the company's operations, supply chain, and capital raising efforts - The COVID-19 pandemic has negatively affected the U.S. and global economy, disrupted supply chains, and restricted travel, with the full impact on the company's performance uncertain[70] - The company has experienced longer lead times for components and implemented teleworking policies, potentially delaying FDA submission and approval[71][72] - The pandemic has led to disruption and volatility in global capital markets, posing a risk to the company's ability to raise additional capital on favorable terms[73] Critical Accounting Policies and Estimates This section confirms the company's adherence to U.S. GAAP and the absence of material changes to accounting policies - The condensed consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and judgments[75] - As of December 31, 2020, there have been no material changes to the company's significant accounting policies and estimates[75] Results of Operations This section analyzes the changes in key operating expenses and interest income over the reporting periods Research and Development This section details the increase in R&D expenses driven by personnel and consulting costs, with expected future decreases | Period | 2020 (R&D Expense, $) | 2019 (R&D Expense, $) | Change (2019 to 2020, $) | Percentage Change | | :-------------------- | :----------------- | :----------------- | :-------------------- | :------------------ | | Three months ended Dec 31 | 1,086,669 | 608,019 | 478,650 | 78.7% | | Nine months ended Dec 31 | 3,150,149 | 1,945,043 | 1,205,106 | 62.0% | - The increase in R&D expenses was primarily due to increased engineering and manufacturing personnel and consulting costs, with R&D employee headcount rising from 8 to 15[77][78] - R&D expenses are expected to decrease for the remainder of fiscal 2021 due to expense management[78] General and Administrative This section explains the rise in G&A expenses due to personnel, stock-based compensation, and facilities costs, with expected future decreases | Period | 2020 (G&A Expense, $) | 2019 (G&A Expense, $) | Change (2019 to 2020, $) | Percentage Change | | :-------------------- | :----------------- | :----------------- | :-------------------- | :------------------ | | Three months ended Dec 31 | 783,898 | 527,829 | 256,069 | 48.5% | | Nine months ended Dec 31 | 2,453,808 | 1,486,386 | 967,422 | 65.1% | - The increase in G&A expenses was mainly due to higher personnel costs, stock-based compensation, and facilities costs, with G&A employee headcount increasing from 2 to 4[80] - G&A expenses are expected to decrease for the remainder of fiscal 2021 due to expense management[80] Interest Income This section highlights the significant decrease in interest income due to lower rates and reduced cash balances | Period | 2020 (Interest Income, $) | 2019 (Interest Income, $) | Change (2019 to 2020, $) | Percentage Change | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | :------------------ | | Three months ended Dec 31 | 22 | 2,331 | (2,309) | (99.1%) | | Nine months ended Dec 31 | 126 | 28,148 | (28,022) | (99.6%) | - Interest income decreased significantly due to a reduction in interest rates and lower average cash balances[81] Liquidity and Capital Resources This section discusses the company's ongoing operating losses, negative cash flows, and reliance on external capital to maintain going concern status - The company has incurred continuous operating losses and negative cash flows, with a net loss of approximately $5.6 million for the nine months ended December 31, 2020[83] - As of December 31, 2020, the company had a cash balance of approximately $0.6 million and an accumulated deficit of approximately $14.2 million, raising substantial doubt about its going concern ability[83] - The company's ability to continue as a going concern depends on raising additional capital through equity or debt, having recently secured funds from a private placement, a PPP loan, and convertible promissory notes (subsequent event)[83] | Cash Flow Activity | 9 Months Ended Dec 31, 2020 ($) | | :-------------------------------- | :-------------------------- | | Net cash used in operating activities | (4,570,713) | | Net cash used in investing activities | (109,541) | | Net cash provided by financing activities | 2,154,662 | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that quantitative and qualitative disclosures about market risk are not required for the company - The company is not required to provide quantitative and qualitative disclosures about market risk[88] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020. There were no material changes in internal control over financial reporting during the nine months ended December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[90] - There were no material changes in internal control over financial reporting during the nine months ended December 31, 2020[91] Part II - OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, and other material information Item 1. Legal Proceedings The company reported no legal proceedings under this item - No legal proceedings to report[93] Item 1A. Risk Factors The company faces significant business risks, including those previously disclosed in its Form 10-K. The ongoing COVID-19 pandemic presents new and emphasized risks related to operations, supply chains, regulatory approvals, and access to capital markets - The company faces many significant business risks, including those previously disclosed in its Annual Report on Form 10-K[94] - The COVID-19 pandemic negatively affects the world economy, supply chains, and financial markets, potentially delaying product production, FDA submission, and regulatory approvals[95][96][98] - The continued spread of COVID-19 could limit access to capital markets or make additional capital available only on significantly detrimental terms[99] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported unregistered sales of equity securities, including 962,387 shares of common stock in a private placement for approximately $2.8 million gross proceeds, and $1.1 million in convertible promissory notes issued in February 2021 - The company sold 962,387 shares of common stock in a private placement (2020 Placement) for approximately $2.8 million gross proceeds since March 2020[100] - In February 2021, the company issued $1.1 million aggregate principal amount of convertible promissory notes[101] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities[102] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[103] Item 5. Other Information This section provides further details on the $1.1 million convertible promissory notes sold on February 8, 2021, including their 12% interest rate, September 30, 2021 maturity, automatic conversion terms upon a Qualified Financing, and options for repayment or conversion at maturity or upon a Change of Control - The company sold $1,100,000 of convertible promissory notes on February 8, 2021, bearing 12% annual interest and maturing on September 30, 2021[104] - The notes automatically convert upon a Qualified Financing (equity offering of at least $5,000,000) at a 20% discount to the lowest price paid by investors[105] - Holders have options for repayment or conversion into common stock at $2.87 per share (or a 20% discount to any financing) after maturity or upon a Change of Control[106][107] - The notes were purchased by the company's chairman and CEO and an existing investor[108] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the form of convertible promissory note, certifications under the Sarbanes-Oxley Act, and XBRL taxonomy documents - Exhibits include the Form of Convertible Promissory Note dated February 8, 2021 (Exhibit 10.21)[109] - Certifications of Paul M. DiPerna pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included (Exhibits 31.1, 32.1)[109] - XBRL Instance Document and Taxonomy Extension files are provided[109] SIGNATURES This section provides the official signatures certifying the accuracy and completeness of the report - The report was signed by Paul M. DiPerna, Chairman, Chief Executive Officer, Chief Financial Officer, Secretary, and Treasurer, on February 12, 2021[114]